FIN+4414+-+Adjusted+Present+Value

FIN+4414+-+Adjusted+Present+Value - Adjusted Present Value...

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Adjusted Present Value
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APV = Base Case NPV + NPV of Financing Decisions Assumptions : Initial Outlay = $10,000 Life = 5 years Cash Flow = $2,850 per year Base Case = financed with retained earnings Unlevered COC for Base Case = 12% Base Case NPV = -$10,000 + [$2,850][PVIFA 12%,5 ] Base Case NPV = $273.61 Adjusted Present Value
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Issue Costs Assumptions : Firm will have only $5,000 of retained earnings Issue cost for new equity = 6.5% To end with $5,000, firm will need to issue: [$5,000]/[1.0 - .065] = $5,347.59 Issue Costs = $347.59 APV = $273.61 - $347.59 = -$73.98 Adjusted Present Value
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Subsidized Financing Assumptions : Government will loan (subsidize) funds at 5% Government loan payments would be $1,154.87 Current market rate is 8% Value of the government subsidy is: $5,000 - [$1,154.87][PVIFA 8%,5 ] = $388.94 APV = $273.61 + $388.94 = $662.55 Adjusted Present Value
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Tax Shelter Assumptions : Firm borrows $5,000 at current market rate of 8% Firm’s marginal tax rate is 35%
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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FIN+4414+-+Adjusted+Present+Value - Adjusted Present Value...

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